Nio's IPO invites US investors to take a leap of faith

Four-year-old Chinese startup plans to become just the second listed electric car specialist after Tesla. It's the latest Chinese venture to seek US investment while far from profitability.

Electric car manufacturer Nio will drive Chinese fundraising on US stock exchanges to one of the highest levels ever recorded if it can steer its $1 billion-plus to $1.32 billion initial public offering in New York across the finish line next month.

Year-to-date the New York Stock Exchange and Nasdaq have raised $5.94 billion for a large group of Chinese companies including iQiyi, Pinduoduo, Bilibili, Uxin and Huya, according to Dealogic. That is only about $1.1 billion lower than 2007, the second highest year for Chinese IPO fundraising in the US.

That record will be broken if Nio is able to price its IPO about the mid-point of its $6.25 to $8.25 price guidance for its 160 million American Depositary Shares. The Chinese firm began collecting institutional orders on Monday, and will price the transaction on September 11, with a range of between $1 billion and $1.32 billion.

Still, that would be some way off the $29 billion of funds raised for Chinese companies in 2014 – the bulk of which was attributed to e-commerce giant Alibaba’ mammoth $25 billion IPO.

In any case, the strong flow of US IPO for China Inc this year reflects growing demand for capital from young startups like Nio, which are unable to raise capital in the domestic market because of stricter rules over cash flows and profitability. 

Nio’s forthcoming floatation is something to cheer for, not only for stock market investors but for Chinese auto lovers as well, as they are about to witness their first homegrown electric car maker making its way into the public market. To many Chinese auto lovers, Nio’s IPO shows the world China’s technology prowess in the electric and autonomous car sector.

For stock market investors, Nio’s prospects are not constrained by the electric vehicle space. The company is at the forefront of developing fully autonomous cars which could disrupt multiple industries and create hundreds of billions of businesses.

THE TESLA EFFECT

Nio, founded only four years ago, is raising capital at a time when the US equities have been trading around record high levels throughout the year. On Tuesday, the Dow Jones Index closed just 1.8% below its all-time high of 26,616 points in late January.

To some extent, Nio’s hope of sealing its IPO on a high note have been buoyed by the recent saga surrounding Tesla and a proposed take-private by its founder Elon Musk.

The US electric car maker was the focus of stock market attention since the beginning of the month when Musk said he planned to delist it for $420 per share. The plan was shelved shortly after, as some existing shareholders argued the stock was worth more than 10 times its current value.

Nio will certainly hope it can share part of the optimism towards Tesla and the electric vehicle space in general in its upcoming IPO. That is despite the fact Nio is nowhere close to Tesla in terms of either technology or commercial production.

Since starting mass production in 2016, Nio has produced 2,200 electric vehicles and delivered 1,381 to its customers, according to its preliminary prospectus. By comparison, Tesla — often beset by its own production concerns — produced 53,400 cars in the second quarter alone. 

That perhaps explains Nio’s extremely thin revenue. The company said it booked only $7 million in income on $503 million loss in the first half this year, and reported negative cash flows of $461 million.

"We have negative cash flows from operation, have only recently started to generate revenues and have not been profitable, all of which may continue in the future," the company said in its preliminary prospectus.

LEAP OF FAITH

All these figures suggest investors will have to take a leap of faith to subscribe to the IPO, since it is almost impossible to come up with a fair value for the company using traditional valuation methods.

For instance, Nio’s implied valuation of $8.5 billion is equivalent to over 700 times its forecast sales this year – a figure probably never seen before in the public market. Tesla trades at 3.85 price-to-sales.

Still, Nio will have rarity value as the only pure-play electric car maker besides Tesla in the global stock market.

Prospective investors in Nio are also buying into the top electric car maker in China, the world's largest auto market. Nio's leading role in China’s electric car push is unlikely to be challenged in the near term since all its local rivals, including XPeng, Byton and WM Motor, have yet to start commercial production.

Active joint bookrunners of Nio’s IPO are Morgan Stanley, Goldman Sachs and JP Morgan. Passive joint bookrunners are Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch, UBS and Citigroup.

Morgan Stanley will be the stabilisation agent.

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